Siemens 2006 Annual Report Download - page 233

Notes to Consolidated Financial Statements
(in millions of €, except where otherwise stated and per share amounts) 229
Stock-based compensation
Under U.S. GAAP the Company applies the fair value recognition provisions of SFAS 123R,
Share-Based Payment (SFAS 123R), which replaces SFAS 123, Accounting for Stock-Based Com-
pensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. SFAS 123R requires companies to recognize stock-based compensation
expense, with certain limited exceptions, based on fair value. Siemens uses a Black-Scholes
option pricing model to determine the fair value of its stock-based compensation plans. In
transitioning to SFAS 123R, the Company applied the modified prospective method. Com-
mencing with the adoption of SFAS 123R, liability classified awards are remeasured to fair val-
ue at each reporting date until the award is settled. Equity awards granted, modified, repur-
chased or cancelled beginning October 1, 2005 and unvested equity awards granted prior to
October 1, 2005, are measured at their grant-date fair value. Related compensation expense is
recognized over the vesting period for awards expected to ultimately vest. Equity awards vest-
ed prior to October 1, 2005 continue to be accounted for under recognition and measurement
provisions of APB Opinion No. 25 and related interpretations. Under German GAAP, up to and
including fiscal 2003, compensation cost in the amount of the option value was accrued at the
date of grant. Beginning with fiscal 2004, compensation cost is measured based on the option
value of the award and is accrued and recognized as expense over the vesting period.
Foreign currency translation
Under U.S. GAAP receivables and liabilities due in foreign currency are translated at the
exchange rate as of the date of the financial statements. Resulting gains and losses are recog-
nized in the income statement. Under German GAAP, receivables and liabilities due in foreign
currency are measured conservatively following the principles of ’lowest’ or ’highest’ value,
respectively. Accordingly, receivables and liabilities due in foreign currency are translated at
the least beneficial exchange rate at the date of the transaction or the date of the financial
statements. Resulting losses are recognized in the income statement.
Derivative financial instruments
Generally, under German GAAP, derivative financial instruments are contingent transactions
that do not meet the definition of assets or liabilities. Unrealized losses on derivative financial
instruments are recognized in income, while unrealized gains are not recognized in the
financial statements. Under U.S. GAAP, in accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, derivative financial instruments are measured at fair val-
ue and recognized on the balance sheet. Changes in fair value are either recognized as income
or presented in accumulated other comprehensive income, provided the derivative instrument
qualifies for cash flow hedge accounting. Provided the derivative instrument qualifies for fair
value hedge accounting, the underlying assets or liabilities are accounted for at fair value.
Deferred taxes
Under U.S. GAAP, accounting for deferred taxes is generally based on the temporary concept as
set forth in SFAS 109, Accounting for Income Taxes, while accounting under German GAAP
uses the timing concept. According to SFAS 109, deferred income taxes are recorded for the
effects of all temporary differences between the tax basis of an asset or liability and its report-
ed amount in the consolidated balance sheet. Temporary differences under U.S. GAAP also
include quasi-permanent differences, i.e. differences that will reverse only at the end of a cor-
poration’s life or upon the sale of land or long-term investments. In addition, deferred taxes
are recognized for net operating loss carryforwards, with valuation allowances established, if
applicable, to reduce deferred tax assets to the amounts expected to be realized.
Notes to Consolidated Financial Statements